PROBLEMS & EXERCISES

SOLUTIONS & DISCUSSION

UNIT ONE (FOR EXAM ONE)

Unit One: Assignment 2: Web Site Problem U1-A2-P1

An increase in the price of a blue widget from $20 to $40 results in a decrease in quantity demanded from 120,000 to 80,000 per month. Is demand elastic or inelastic, and why?

What if the quantity demanded fell from 120,000 to 60,000?

What if the quantity demanded fell from 120,000 to 30,000?

If you're not sure of the answers, then use the total revenue test for elasticity. Alternatively, you can substitute into the midpoints formula. Avoid using the general formula for this question because the percentage change varies too much depending on whether you start at $20 and double the price to $40 or start at $40 and cut the price in half to $20. Also, when specific data is available, it is preferable to use the midpoints formula instead of the general formula.